2018-03-15

Trade Rebalacing: After China, Germany

Making matters worse, everyone knows that it is Germany's FX subsidy courtesy of the EUR - which replaced the far stronger Deutsche Mark - that makes Berlin one of the biggest currency riggers in the world. In fact, "a Chinese official commented a few years back that Germany, not China, was actually the world's biggest currency manipulator - in tying its currency to far weaker economies, the real DM is massively undervalued."

Ironically, Germany is aware of what is coming, and as Edwards writes, he agrees with former German Finance Minister Schäuble, who correctly pointed out that it was the ECB's QE policies that exacerbated the trade situation, in stimulating capital flight from the eurozone that (by identity) has increased the overall trade surplus by depressing the euro.

As a result, Edwards expects Trump to "soon turn his protectionist fire on both Germany and the EU. That will be messy."

...So what happens next? Using Japan as a template for the "economic and financial Ice Age unfolding in the west" Edwards made one major contrarian prediction: "to those in the noughties who said a bust in the US and Europe would be nothing like the 90s bust in Japan, I agreed. I thought it would be much worse because the west did not enjoy Japan's high levels of equality and social cohesion."

Looking at recent events, it appears that when confronted with Japanese-style pain, he's been right: western electorates' anger is boiling over... the only thing keeping social sanity in check are near record high stock prices. That, too, will go soon one central banks finally end their daily manipulation some time over the next year.

In that context, Edwards concludes, he has "always viewed competitive devaluation and trade war as a likely endgame of the predicament we find ourselves in. It's just coming sooner than I expected!"

One lost decade is one too many.

Currency devaluation was always the end point assuming governments and central banks do not allow widespread debt default. The only question was when: would the governments/central banks act proactively or wait until a crisis? Many thought 2008 was that crisis, but central banks could not restart lending. All they did was monetize the existing monetary base. The potential for inflation is there, but it requires private sector credit growth. Ten years have passed, but the balance sheets are still impaired. Nothing has been solved then, and voters are reacting in frustration.